Planning for College Tuition

June 27th, 2017 No comments

If you are a parent with young children, it is never too early to begin to save for the high cost of a college education. Here are two popular tax-favored programs you can consider. Keep in mind that the earlier you begin to participate in these programs, the greater the amount that will be available for tuition.

Qualified Tuition Program (QTP). A qualified tuition program (also known as a 529 plan for the section of the Tax Code that governs them) may be a state plan or a private plan. A state plan is a program established and maintained by a state that allows taxpayers to contribute to an account for paying a student’s qualified higher education expenses. Similarly, private plans, provided by colleges and groups of colleges allow taxpayers to contribute a student’s qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualifies as higher education expense.

Though contributions to 529 plans are not deductible for federal income tax purposes, they are deductible for PA personal income tax. Be sure to read our May 2, 2017 blog regarding PA 529 plan contributions and its restrictions on tax deductions. In addition, PA is considering restricting the tax deductibility of 529 contributions to PA plans only. (The current rules allow tax deductions for contributions made to out-of-state plans).

Coverdell education savings accounts. Coverdell education savings are custodial accounts similar to IRAs. Funds in a Coverdell ESA can be used for K-12 and related expenses, as well as higher education expense. The maximum annual Coverdell ESA contribution is limited to $2,000 per beneficiary, regardless of the number of contributors. Excess contributions are subject to an excise tax.

Entities such as corporations, partnerships, and trusts, as well as individuals can contribute to one or several ESAs. However, contributions by individual taxpayers are subject to phase-out depending on their adjusted gross income. The annual contribution starts to phase out for married couples filing jointly with modified AGI at or above $190,000 and less than $220,000 and at or above $95,000 and less than $110,000 for single individuals.

Contributions are not deductible by the donor and distributions are not included in the beneficiary’s income as long as they are used to pay for qualified education expenses. Earnings accumulate tax-free. Contributions generally must stop when the beneficiary turns age 18, except for individuals with special needs. Parents can maximize benefits, however, by transferring the older siblings’ account balance to a younger brother, sister or first cousin, thereby extending the tax-free growth period.


In addition to the above two plans, other ways to save for a college education include: Read more…


Premium Tax Credit Verification Audit

June 20th, 2017 No comments

The IRS has begun auditing taxpayers who purchased health insurance coverage through the Health Insurance Marketplace (also known as an exchange) and reported that they were eligible for a premium tax credit (PTC) when filing their Form 1040. The IRS audit letter (Form 14950) states that if the taxpayer did not retain the documentation requested by the IRS, s/he needs to contact the appropriate parties to obtain this information.

The information requested by the IRS includes: Read more…


You Need to Update Your Beneficiaries

June 13th, 2017 No comments

Unfortunately, it seems that every tax season we learn that a client’s spouse passed away and there was no will. Perhaps the plan was to have this matter done at a later date.

Let us assure you that if you do not have a will (or some other form of estate planning), there is no better time than today to get started on your estate plan. You do not want to have your grieving spouse’s life to be further complicated financially and emotionally because no estate plan was in place. Spending a couple of hours thinking about your estate plan may help you avoid costly mistakes and unintended consequences. Topics of discussion you should consider having with a very good estate planning attorney are Read more…


Know the Tax Rules If Considering In Vitro Fertilization

May 30th, 2017 No comments

In vitro fertilization (IVF) is an expensive medical procedure whereby an egg is fertilized by sperm in a test tube or elsewhere outside the body. An IVF procedure can be tax deductible as a medical expense subject to the same limitations as any other medical expense. The limitation is that such medical expenses are tax deductible to the extent they exceed 10 percent of the taxpayer’s adjusted gross income (AGI). By way of example, if a taxpayer’s adjusted gross income is $100,000 and the taxpayers incurs $12,000 of medical expenses, the taxpayer is allowed a tax deduction of $2,000 ($12,000 less a $10,000 limitation (10% times $100,000 equals $10,000, the limitation).

However, taxpayers have not been entitled to the IVF medical deduction when Read more…


Business Owner Denied Repair and Maintenance Expenses

May 25th, 2017 No comments

It is important to learn from the mistakes of others. Detailed documentation of expenses is absolutely vital to sustain a tax deduction.

In a recent Tax Court case (Charles F. Schuetze, TC Memo 2017-74), an attorney formed an LLC with another person to purchase a bed & breakfast property located in Indiana in 2007. It was the former residence of Larry Bird. Due to mounting losses, the B&B was closed in 2010 and put up for sale. The LLC’s losses totaled more than $250,000 and included repairs and maintenance deductions.

The IRS contended that Schuetze used the B&B for personal use. The tax rule is that if a taxpayer uses a residence for more than the greater of 14 days or 10% of the number of days during the tax year that the property is rented at a fair rental value, it is used for personal use and tax deductions are limited. The court noted that a pass-through entity, such as the LLC, is considered to have made personal use of a dwelling unit on any day on which any beneficial owner made personal use of the dwelling.

The taxpayer argued that the days he spent at the B&B were mostly to perform repairs and maintain the property. If a taxpayer is engaged in repairs and maintenance of the dwelling unit substantially full time on any day, that day will not constitute personal use of the unit. When determining if a taxpayer can exclude the time spent at the dwelling as not constituting personal use, the IRS considers Read more…


IRS Imposes Penalty for Claiming Home Office

May 16th, 2017 No comments

In the Tax Court case of Edgar Brown, several claimed expenses were addressed by the court. We will look at two of them, unreimbursed employee expenses and the home office deductions that were claimed by the taxpayer. The court’s finding was that it agreed with the IRS’s disallowance of these deductions. Let’s look at why the taxpayer lost.

Mr. Brown was a financial services professional who claimed unreimbursed automobile, tolls, parking and publication expenses that were denied by the IRS. To claim unreimbursed employee expenses, the employee must have been Read more…


Legitimate Business Loss or Disallowed Hobby Loss

May 9th, 2017 No comments

As a new business owner, you may find that it takes a couple of years to become established in your market place and to make a profit. While you are operating at a loss and wondering if and when your business will eventually become profitable to pay your bills, you seemingly have the comfort of knowing that your losses are tax deductible and can offset other sources of income. Or do you?

Did you know that if a business fails to generate profits in at least two years in a five-year consecutive period, the IRS presumption is that Read more…


PA 529 Plan Contributions – Know the Rules

May 2nd, 2017 No comments

Do you want to reduce your PA personal income taxes?

As a PA resident, your contributions to a 529 account may be tax deductible from your PA state income tax. Notice the use of the word “may” versus “are” tax deductible. Many taxpayers are under the misconception Read more…


Penalty for Failure to Review Your Form 1040

April 25th, 2017 No comments

The IRS requires that as part of a professionally prepared tax return that the taxpayer review his/her return before it is e-filed. This review process is important because the taxpayer is signing under penalties of perjury that the return and accompanying schedules and statements were examined by the taxpayer and to the best of the taxpayer’s knowledge and belief, that the return is true, correct and accurately lists all amounts and sources of income received during the tax year. It also states that the preparer is preparing the return based on the information received from the taxpayer.

In the tax court case of John J. Sweeney and Donna L. Sweeney v. Commissioner, TC Summary Opinion 2016-32, the taxpayers conceded that they failed to include all of their (unreported) income on Schedule C of their return, but contested the imposition of the IRS 20% accuracy-related penalty.

The IRS audit exam resulted because third-party insurance company payers reported more income on Form-MISC than the taxpayer reported on Sch. C as insurance commission income.

The IRS and the court found the taxpayer’s numerous arguments frivolous and without merit. The taxpayer acknowledged that he had received the unreported income and could offer no explanation as to how he arrived at the amount of income shown on his Sch. C. In fact, the taxpayer acknowledged that the reported gross receipts “couldn’t possibly be right.”

The taxpayers argued Read more…


Need To Make an IRS Tax Payment

April 18th, 2017 No comments

Since today is the due date for filing 2016 Form 1040, some taxpayers are going to find themselves worrying about filing their returns and paying the balance owed on 2016 taxes. Let’s attempt to reduce some of that stress.

First, if an individual files IRS Form 4868, he can receive an automatic extension of time to file his 2016 tax return until October 16, 2017. The filing of this Form 4868 provides the taxpayer an additional six months to file his 2016 tax return without incurring late filing penalties.

However, the IRS does not grant extensions of time to remit the taxes due. The remaining tax liability will be subject to late payment penalties if not paid by April 18. In other words, you can file your return after April 18 if an extension is timely filed, but all taxes are due April 18. If you cannot pay the full amount due, you should Read more…

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